StartUp: Managing your startup’s cash flow during a crisis

Cash has always been the blood of any successful business. Managing cash for a startup efficiently has always been a pathway to create a prosperous business. But like any business, start-ups also have issues in managing cash in its initial years. However, in the times which we are witnessing due to COVID-19, the entire economic system and supply chain is paralyzed. The acute cash crunch has become a concern for every next startup.

As per Crunchbase, 29% of startups have shut down had run out of cash. And that's the second most common reason for failure in start-ups. Mind it that this startup shut down due to cash flow issues only, and nothing else. The times when businesses are down or even shut for months, it’s hard to pay off the liabilities, meet other expenses that are to be incurred even if the operations are restricted for the time being.

There are no recoveries, monetizing the assets is tough, and liquidating the investments is at times done at loss. The demand problem which already existed in the Indian Economy since the previous 4 quarters has further worsened. The supply chains are affected since there is no sync in processes involved due to overall uncertainty. At such testing times, start-ups need to be conservative with their cash as it is still uncertain when things will get back to normal or precisely the new normal will be adopted.

Following are some ways to efficiently work out cash woes in this phase of the crisis:

1. Watch your expenses and look for substitutes

The discretionary spends must be avoided and the priorities must be planned. Typically, expenses that directly result in immediate/short term revenues are only to be continued until the situation improves. Calculate and work out a reasonable pay for all the employees for the time being. In these testing times, instead of laying off the employees, it will be better to pay less than take off their source of livelihood.

Instead of increasing the people on your payroll/fixed costs, hiring interns or contract basis professionals or even outsourcing a certain job will be an economic option to get things done for the time being, wherever possible. Or, the marketing techniques can move from other mediums to more of organic marketing without any budget.

2. Keep looking for funding sources

Having a war chest always helps in survival and competing in turbulent times. It's complicated to raise funds at the moment but take the time to arrange cash for current as well as future business prospects. Typically, the market observes correction in value to the affected business and a bit of flexibility can be a better option in valuation if the business is affected by the lockdown. There are different schemes announced by the governments that should be taken benefit of, as and when a start-up is eligible. Keep in touch with your consultants to be aware of or obtain any guidance about any schemes and eligible benefits which you can avail.

3. Manage the Receivables and Payables of your startup smartly

Give out offers and discounts to your debtors to release their payments in time. B2C startups can give freebies to get more business until normalcy returns. You could get discounts for making early settlements or take some extended credit period if necessary. Make use of invoice financing methods like purchase financing, factoring of receivables, discounting of bills, etc.

4. Make use of your assets

Sell off assets which are not very useful as of now or shortly. Rent/lease out the assets which are not in use now and can be rented or leased out in the market. In extreme cases, the assets like buildings/ land are also sold to make up for the cash Even sale and leaseback of assets can be done to financially support the start-up. Liquidate the investments if necessary.

5. Pivot and grab available opportunities

If the startup is in the non-essential category, look for pivots into essential categories for temporary use of available resources and to keep the company floating. For e.g: A medical equipment startup has started the sale of sanitizers, PPE and other hygiene products on the website. These alternatives can be a good source to make some extra cash and reduce the financial burden for the time being. However, make it a point that the extra money which you are supposed to be earning doesn't call for an undue amount of investments and it has to be done from the existing available resources.

6. Be conservative with your upcoming plans

If the market is not favourable be conservative with your plans. Hold on to the plans and execute them in time where they are more likely to execute successfully. In this way, you won't end up spending your money while there are no returns against it. Invest the time in researching and analysing the correct time and techniques to adapt to the new normal and make wise decisions. Make it a point to save cash as much as possible, now and even for times to come. Take this crisis as a lesson to realize how important it is to maintain sufficient cash balance at all the points of time for emergencies and contingencies.

These were very few tips based on my personal opinions and observations. There can be more ways depending upon your start-up model and nature of business. However, the key is to observe the inflows and outflows vigilantly. Keep adapting with times to ensure that the goals are met without incurring excess financial obligations.

Someone said it right, business, growth, market penetration is all superficial, but cash is real. It can’t be more important than in this situation!

About the Author

Niraj Bora, Founder, Surmount Business Advisors Private Limited

Niraj Bora- Surmount Business Advisors Private Limited

Niraj Bora set up Surmount Business Advisors Private Limited in 2013. Bora is a member/investor with Mumbai Angel Network and a working committee member of JITO Angel Network. He is a hands-on investor, working actively with startups he invests in. He is on the board of quite a few startups and has served on the jury panel of fund-raising events held to evaluate new startup ideas. A keen follower and writer on trends and news about world economy, policymaking and startup ecosystem, he is of the firm view that tech startups can revolutionise India and catapult it into the much-vaunted $5tn India’s economic target.